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  • Writer's pictureColleen

Understanding The Secondary Mortgage Market

What is the secondary mortgage market?

Luckily you actually will never deal directly with the secondary mortgage market. You as a consumer will only ever deal with the primary mortgage market, which would be the banks, credit unions, and other financial institutions giving out loans. The secondary market is made up of the government backed financial institutions who buy your mortgage from those who first gave you your mortgage loan. This is great, because when they buy the loan from the banks, the banks receive an influx of cash which means they have more money available to give out new loans to people and corporations. So basically, the secondary mortgage market is a marketplace where home loans and servicing rights are bought and sold between lenders and investors. A large percentage of newly originated mortgages are sold by the lenders who issue them into this secondary market, where they are packaged into mortgage-backed securities and sold to investors such as pension funds, insurance companies, and hedge funds. It is also extremely large and liquid, and helps to make credit equally available to all borrowers across geographical locations.

Before the secondary market was established, only larger banks had the extensive funds necessary to provide the funds for the life of the loan, usually for 15 to 30 years. Because of this, potential homebuyers had difficulty finding mortgage lenders. Because there was less competition between mortgage lenders, they were able to charge higher interest rates. 

The 1968 Urban Housing and Development Act solved this problem by reorganizing Fannie Mae into a for-profit, shareholder-owned company. Freddie Mac was established in 1970 with the Emergency Home Finance Act to assist thrifts with managing interest rate risk.



There are a few different organizations in the secondary market. If you want to learn more I have some resources below:

Fannie Mae- Federal National Mortgage Association

Fannie Mae was the original secondary market. They came into play buying VA guaranteed, FHA insured, and conventional loans.

Freddie Mac- Federal Home Loan Mortgage Corporation 

Freddie Mac started in 1970 and buys VA guaranteed, FHA insures, and conventional loans.

Ginnie Mae- Government National Mortgage Association

Ginnie Mae underwrites, meaning the create mortgages for VA guaranteed, FHA insured, and USDA rural mortgages.

Farmer Mac- Federal Agricultural Mortgage Corporation

Farmer Mac underwrites mortgages on agricultural real estate.

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